Tax the Rich? French and British Leaders Spar over Plans to Make Wealthy Pay Up

Criticism by U.K. Prime Minister Cameron of proposals by French President Hollande to hike tax rates on the rich sparked irritation in France; a closer look reveals that the U.K. is hardly the Thatcherite paradise the posh Cameron claims it is

David Cameron seems to enjoy pushing French buttons, and he’s good at it. Cameron’s criticism on Monday of a tax hike on the rich proposed by France’s Socialist leaders sparked another bout of French railing against perfidious Albion. Yet Britain’s Conservative Prime Minister may not have the last laugh if French officials calm down enough to notice that the house from which Cameron is chucking stones appears to be made of glass.

The latest Franco-British spat was provoked by Cameron’s comments to business leaders in Mexico ahead of the G-20 summit there. He mocked French Socialist President François Hollande’s pledge to raise the tax rate on annual income exceeding $1.27 million to 75% — up from France’s current 41% ceiling. Echoing a core tenet of the kind of conservatism practiced by his party’s most iconic leader, Margaret Thatcher, Cameron said Hollande’s soak-the-rich plan would backfire, creating a flight of French capital that Britain stood ready to exploit.

“When France sets a 75% top income tax rate, we will roll out the red carpet, and we will welcome more French businesses, which will pay their taxes in Britain,” Cameron declared — “partly in jest,” his handlers later explained. “That will pay for our public services and our schools.”

Hollande was clearly not amused. “Everyone should take responsibility for what he says,” the French President retorted tersely on Tuesday. “At a time when European solidarity should be strong, I will do nothing to breach it.”

French fiscal experts say loopholes, exemptions and wily accountants allow France’s wealthiest people to pay just 18% income tax on average, about half the national mean. Hollande argues that creating new brackets for millionaires will oblige them to start paying their fair share of society’s bills and help finance the government’s efforts to stimulate the sluggish economy and reduce sovereign-debt levels. But Cameron hasn’t just stretched patience with his intervention in that debate. He’s doled out repeated lectures to euro-zone leaders on how to manage the currency that Britain doesn’t use. He applauds Germany’s calls for austerity despite criticism from economists who believe the belt-tightening policies of Cameron’s coalition government have been partly responsible for Britain’s slide back into recession.

Should Hollande and his seething French backers decide to slap back, however, a good place to start would be within the U.K.’s own tax structure, social services and economic predicament. Because while it goes without saying the estimated 3,500 wealthiest households likely to be hit by the 75% tax hike won’t like that squeeze at all, it’s equally true that they’ll be among the few in France inclined to feel they’d have it better off in Britain.

Though France’s nominal top income tax rate in fact rises to 46.7% when a linked contribution is factored in, that’s still considerably less than the U.K.’s 50% maximum level. (Britain’s rate is tied as fifth highest in Europe, behind model welfare states like Sweden, Denmark and the Netherlands. France is ninth.) And the services taxpayers get for their money are often inferior on the British side of the English Channel. France’s health care system outperforms Britain’s on most scores. Nationalized public transport in France is generally more affordable and usually provides better service.

True, France’s 33.3% corporate tax rate is higher than the U.K.’s 26%, but headquarter-hunting global CEOs may find Britain’s usual allure dimming under government plans to give shareholders more power over rising executive pay. Meantime, repeated surveys have shown that taxation is only one factor determining where companies decide to locate and operate. Infrastructure efficiency, geographic centrality, general quality of life and employee performance all loom equally large. Similar qualitative concerns — in addition to tax levels — also shape where some citizens decide to set up camp. The estimated 200,000 to 300,000 people from France who now live, work and generally prosper as permanent residents of London clearly demonstrates that the U.K. offers advantages those ambitious and upwardly mobile French expats can’t find at home. But they’re also hardly the largest group thinking that they see greener grass across borders.

Britain itself is the largest source of expatriates among countries in the Organisation for Economic Co-operation and Development, with some 3 million citizens living abroad (135,000 of those reportedly in France). France has about 1.6 million registered expats. That gap keeps growing. Though the annual rate of French citizens leaving for foreign nations more than doubled from 2010 to ’11 to about 96,000 — a number that pales in comparison to the 350,000 Britons who, on average, emigrate each year.

Worst still, the U.K.’s outward-bound ranks look increasingly likely to involve the sort of rich folk Cameron is hoping to wave in from France. According to expat website whichoffshore.com, a recent study found that “19% of wealthy Brits [are] … looking to leave the U.K. due to issues such as high taxes, poor public services, red tape and lack of investment in infrastructure.” Another survey the site quotes puts the level of British millionaires inclined toward emigration at a whopping 50%, while “Italy, France and Dubai recorded just one out of 10 millionaires wished to move abroad.”

Yet, if he does his homework, Hollande will see that Cameron is the wrong leader in the wrong position to be sounding this particular alarm. Hollande could also remind Cameron that both France and the notoriously tax-hating U.S. have long maintained top tax rates of 70% to 85% or more without the affluent of either nation rushing for the exits. And that historical fact — a straight-faced Hollande might add — is no joke.